Hillary Clinton, Barack Obama and John McCain may all be holding out lofty promises of change, liberation and national renewal to the American voters in November's presidential election, but the more pressing issue for many is whether they will still have a job - or a home - by the end of the year.

For more than 18 months, sliding house prices, sickly wage growth and the rising costs of food and fuel have been gnawing away at the feelgood factor.

David Demmler, who has driven his bright-red, 18-wheeler Peterbilt truck, with black fenders, over every inch of the United States for close to 40 years, says the rising price of fuel is squeezing businesses everywhere: 'Since my father started this business after the Second World War, we have always hauled fuel oil and a lot of railroad oil. So I hear it from our customers too. The price of everything is going up.' Diesel is now so expensive that his company Covered Wagon, like most of its rivals, is charging a fuel surcharge in an effort to recoup some of the extra costs.

Mary-Anne Parmley, who owns Covered Wagon, has also noticed a difference. 'I do worry about the recession, and the rising price of oil has affected us terribly,' she says. Trucking is her life: 'We went on our honeymoon in one of our trucks; to Hicksville, New York.'

But these days she finds running the business a struggle. She has cut as many overheads as possible and hopes that business remains strong so she can afford to keep her staff of 50 employees and fleet of 40 trucks: 'I have considered giving this up, especially when I got divorced, but the people here are what keep me going. We have to find a way to get through this recession for them. They are why I show up every day.'

Jared Bernstein, chief economist at Washington-based think-tank the Economic Policy Institute, says the truckers' experiences are echoed by Americans in many walks of life, right across the US: 'We are demonstrably into a period of slow growth. People are absolutely more pinched. Their pay cheques are not taking them so far, and their jobs are more insecure - if they still have a job. This is what a slowing economy feels like.'

News that the economy expanded by only 0.6 per cent in the last quarter of 2007, making it the weakest year since 2002, confirmed what many both on Wall Street and in the real world had guessed: a sharp downturn is under way.

Amid fears of recession, the economy will inevitably be high on the electoral agenda and policymakers are scrambling to prevent the slowdown from going out of control, just as the voters prepare to go to the polls.

Ben Bernanke, the former Princeton professor who is chairman of the Federal Reserve, sharpened his academic reputation by scrutinising the failings of policymakers that turned the 1929 Great Crash on Wall Street into the grinding Great Depression that left millions of Americans jobless. In particular, he has studied the way the 'credit channel' - the flow of lending through the economy - can help or hinder interest-rate policy.

Bernanke's aggressive approach since the events of last summer, which has seen rates cut dramatically, from 5.25 to 3 per cent since September, is a reflection of his determination to avoid the perils of doing too little, too late, and to prevent credit from drying up.

If his efforts work, the economy should start to pick up in the second half of 2008 - and not everyone is panicking yet. Simon Ward, of New Star Asset Management, says the recession warnings are so far not all flashing red.

'There are missing links in the recession argument,' he says. 'Inventories are very low, and they normally start to rise before a recession; exporters are performing well. The other uncertainty is the labour market. Normally in recessions, you get less hiring, and layoffs. We're seeing less hiring, but we're not yet seeing layoffs, or don't seem to be.'

The sharp decline of the dollar over the past year has helped to boost exports, providing a welcome source of economic growth as consumers stay at home: 'What you have to remember is that the US has been growing at below trend for 18 months now, so cumulatively it's already been quite a significant period of weakness.'

But with little sign of house prices bottoming out, and a backlog of thousands of new homes standing empty and unsold, there are growing fears that the economy could be about to lurch into a painful new phase, despite the Fed's unprecedented rate-cutting spree. The closely watched ISM survey suggests that activity in the crucial services sector contracted in January, for the first time in more than four years, sparking renewed talk of a recession - and yet another violent sell-off on Wall Street.

Central bankers' worst nightmare is that if things get too bad, their major weapon - interest-rate cuts - becomes ineffective. If shell-shocked banks are reluctant to lend, or if consumers' finances are in such a dire state that they have no appetite for taking on fresh debt, then lowering borrowing costs throughout the economy may no longer work.

This is what happened in Japan as it slipped into the 'lost decade' of deflation and recession in the Nineties. 'We are about to see whether the Fed is running into the classic problem of "pushing on a piece of string",' says Graham Turner, of GFC Economics, who has studied the Japanese experience closely.

In one of the most alarming pieces of evidence about the deteriorating health of the economy, the Fed's latest survey of lenders showed that, notwithstanding the battery of rate cuts, the banks are squeezing the supply of loans, both to companies and consumers, as they try to make up for the costly mistakes of the sub-prime debacle.

More than 80 per cent of lenders told the Fed they were clamping down on loans to the commercial property sector, a higher proportion than in the aftermath of the Savings and Loan crisis of the early Nineties or the dotcom bust of 2001. This drying-up of the supply of debt shows the 'credit crunch' at work.

The parlous state of America's financial sector has already been underlined by the desperate fund-raising efforts that have led to sovereign wealth funds from oil-rich states buying up chunks of embattled banks. Citigroup and Merrill Lynch alone have raised an extraordinary $21bn between them, from a hotch-potch of investors including the Singaporean and Kuwaiti governments. The exposure of the problems in the monoline insurance companies, which underwrite many bond-issues, demonstrated that difficulties in one part of the financial system can set up devastating domino effects elsewhere.

Charles Dumas, of Lombard Street Research, argues that, after many years of living on the never-never, the US will have little alternative but to 'sell the family silver' and attract more foreign investment, an option that will become more feasible as share prices fall further: 'The private sector is shifting towards that solution, by simply the blind force of circumstances.'

Even with a much-needed injection of foreign cash, America's banks seem to have embarked on a bout of concerted belt-tightening. This is the worst-case scenario for Bernanke and the White House - that slashing interest rates and throwing cash at households fails to work, because lenders turn off the credit taps and consumers who have been on a decade-long borrowing binge decide to save their rebate cheques, instead of taking an economy-boosting trip to the shops.

'Fiscal stimulus is the right policy,' says Dumas, 'The problem is that if it's done in the form of tax rebates, it might not be spent.'

Bernstein adds: 'Folks have very little padding to fall back on. Savings rates are quite low; the American consumer is quite leveraged, and their main asset - their home - is no longer appreciating in value.'

House prices have dropped by an average of about 7 per cent across the US, and much faster in some cities, but historical experience suggests that property downturns take several years to unfold. And the future path of house prices is likely to be the key to how much worse things become. If tighter lending causes prices to fall further, leading to another round of defaults by borrowers, more losses for the banks and further cutbacks in lending, the credit crunch could become a vicious circle.

'The further house prices fall, the more risk there is of a complete consumer capitulation,' says Julian Jessop of Capital Economics.

In 2004, when George W Bush retained the White House, the economy barely figured in the election campaign. But since the credit crunch began to bite in earnest last summer, and with repossessions proliferating, it has shot up voters' radar. According to a poll by the Washington Post last week, the economy recently overtook the war in Iraq as by far the most salient issue, as Democrats and Republicans choose their presidential candidates.

These growing levels of worry among the public help to explain the White House's determination to implement an emergency economic stimulus package, worth $150bn (£77bn), representing 1 per cent of GDP. The measures were agreed with Democrats in Congress, and Bush was so keen to clinch a deal that he abandoned his long-held ambition of making his tax cuts permanent. But the sheer scale of the package - $100bn of tax rebate and $50bn in tax cuts for businesses - suggests it is a desperate attempt to prevent the economy sliding into a painful downturn, handing Clinton or Obama an easy target.

'The shape of the Bush team's package seems to have been dictated largely by an overriding concern to avoid a US recession at a sensitive stage in the political cycle,' says Stephen Lewis, of Insinger de Beaufort.

However, paying for the tax rebates for American families will plunge the government's finances deep into the red, and leave the new President with a huge deficit. That will make it tougher to find the cash for ambitious proposals on education, healthcare or, in McCain's case, tax cuts. The government's finances had only recently started to improve after Bush's tax cuts and the price of the 'war on terror' wiped out the surpluses built up by Bill Clinton in the late Nineties.

Even before the current slowdown grew ugly, the economy was becoming an increasingly important electoral issue. Two years ago, when the Democrats swept the board in both houses of Congress in mid-term elections, there was widespread discomfort about the 'middle-class squeeze' - the idea that strong economic growth was not translating into higher incomes for ordinary working Americans.

'There is a sense that the economy has done pretty well, but people haven't done very well out of it,' says Bernstein. Democratic candidates in the mid-terms were fiercely critical of Bush's massive package of tax cuts, implemented after the dotcom downturn, which were skewed towards helping the wealthy.

'There's a kind of fatigue with Bushonomics, a notion that the Bush economic agenda has been quite favourable for corporations and high-wealth individuals,' says Bernstein. On Clinton's campaign website, 'strengthening the middle-class' is top of the list of issues on which she promises to take action.

Offshoring - the process of jobs in traditional areas of strength for America, such as manufacturing, moving to lower-cost economies such as China and India - has also been controversial for some time, with campaigning Senators calling for trade sanctions against China, to force Beijing to float its cheap currency. Those demands have faded somewhat as the greenback has weakened, but with unemployment rising, candidates from both parties will have to offer their own convincing prescriptions for nursing the economy back to health.

Jason Furman, of the Brookings Institution, an adviser to Bill Clinton's White House, says US politicians may have to be very patient as they wait for the giant dose of medicine to take effect.

'The cheques [from Bush's emergency tax-rebate package] won't arrive until May or June, and the evidence is that people will not spend the money straight away, but I do think it will kick-start the economy by the second half of the year,' he says. 'This is a substantial amount of monetary easing. We have never seen rates cut this much, this quickly.'

And, unlikely as it now seems, Furman reckons Bill Clinton's mantra that, 'it's the economy, stupid', may be less true, this time around, at least once the primary race is decided.

'The difference between the Democratic nominee and John McCain on Iraq is going to be much bigger than the difference between Obama and Hillary, or McCain and Romney or Huckabee,' he adds. ' When you're talking about getting troops out within a year, compared to keeping them there for a hundred years, which is what McCain is saying, that's going to focus things. People think the economy's a big issue, but in their gut, I think they think the President can do more about Iraq than the economy.'

Bernstein also says that self-sufficient Americans tend not to expect the President to lift them out of the economic doldrums: 'I don't think people necessarily look to the government to help them; but there's very much a feeling that the government shouldn't hurt us.'

But after McCain, perhaps unwisely, told the Boston Globe that 'the issue of economics is not something I've understood as well as I should', the winner of the Democratic nomination is certain to try to exploit this potential weakness. McCain stresses his experience as 'a foot soldier in the Reagan revolution', but the legacy of Reaganomics is still hugely controversial. The Democrats are likely to point out that his zealous tax-cutting created vast budget deficits.

Whether or not it's 'the economy, stupid' at the stump, whoever walks into the White House at the start of 2009 is likely to be haunted by the sub-prime crisis for a long time to come. 'I don't think it will be over by then,' says Furman. 'Housing corrections take a pretty long time.'

Back on the road, Demmler sees hard times hitting Americans from every walk of life as he rumbles across the Great Plains. 'Especially down in Arizona and New Mexico. On the Reservations, you see terrible, terrible poverty. But these days you see hardship all over.'

Promises, promises: the key policies

BARACK OBAMA: Democrat

Obama is avowedly free market, and his programme has the tax cuts espoused by both Clinton and McCain - but he also puts a strong emphasis on sharing America's prosperity, and preventing corporate abuses.

'We are all in this together. From CEOs to shareholders, from financiers to factory workers, we all have a stake in each other's success,' he says.

His key policies include:

· a new 'making work pay' tax credit, worth up to $1,000, which would lift 10 million families out of paying income tax altogether; and simplifying tax filing, so that it takes 'less than five minutes'

· insisting that environmental and labour standards are included in trade deals - an approach opposed by many developing countries, which say it makes it harder for them to compete

· using federal funds to create new jobs and training programmes in green technologies

· boosting trade union rights - he has supported the Employee Free Choice Act, which would secure workers' right to organise; and would also protect the right to strike

· cracking down on offshore tax havens - Obama signed up to the Stop Tax Haven Abuses Act currently going through Congress

HILLARY CLINTON: Democrat

Rising inequality and waves of home foreclosures are high on the agenda for the New York Senator, who says: 'I believe that the middle class is the backbone of our economy, the key to real growth, and the guarantor of the American dream.'

In order to bolster the fortunes of the hard-pressed middle class, she promises to restore 'fairness' to the economy, and 'renew the basic bargain that if you work hard, you can get ahead'.

Her policies include:

· 'moving toward' a balanced government budget: Bush is leaving the White House with the legacy of a $400bn deficit for the coming financial year, and Clinton can point to the surpluses achieved during her husband's term in office

· establishing universal healthcare, and capping its costs: a policy that alarms the pharmaceutical giants, with their powerful lobbying arms in Washington

· putting pressure on Wall Street to tackle the crisis in the housing market, by offering a moratorium on foreclosures, and freezing adjustable rate loans

· offering government tax cuts of up to $1,000 to match families' savings and encourage them to prepare for their retirement

· boosting the power of trade unions

JOHN MCCAIN: Republican

McCain is keen to bolster his credentials with sceptical conservatives in the Republican party by stressing his enthusiasm for tax cuts, and positioning himself as a 'free-enterprise, capitalist, full-bore guy'.

McCain opposed Bush's tax-cut measures in 2001 and 2003, arguing that they benefited 'the most fortunate among us at the expense of middle-class Americans'; but is now determinedly reminding voters of his experience in the tax-cutting Reagan regime. He also has the overwhelming backing of economists on Wall Street, according to a recent survey by the Wall Street Journal.

McCain's key economic policies include:

· making it impossible to increase taxes without a three-fifths majority in Congress

· vetoing 'pork barrel' spending bills in which politicians secure funding for pet local infrastructure projects - and naming and shaming their authors

· cutting taxes for middle-class families; and making the Bush tax cuts permanent

· cutting the corporate tax rate from 35 per cent to 25 per cent

· establishing a permanent tax credit to support research and development

· lowering trade barriers through bilateral and multilateral talks; but tackling the impact of globalisation on American workers by improving education, and offering retraining